Mistakes Your Financial Advisor is Making with Your Portfolio

the more of your (and Ari's) videos I watch, the more I realize how many folks make less-than-optimal financial decisions in their retirement because of the "rules of thumb" and cookie-cutter advice/strategies from the investment companies. thank you for such lucid and well-communicated content, James.

I am surprised you do not talk about the very simple and well known workaround on the issue that you raise about the withdrawal in a stock down market. In that period, in your tax advantaged account, replace the bond with stock. It should be a non taxable event. And withdraw the same amount from you taxable account. Globally your stock/bon allocation remains exactly the same.

Well, James, Vanguard is assuming a 50% stocks 50% bonds allocation for life. That means, if you have stocks in your taxable account, and you are drawing down your taxable account, you are rebalancing by buying more stocks out of the bonds you were previously holding in your tax deferred and tax-free accounts. That methodology is not explained by the Vanguard article, but I believe it is implied by Vanguard statement that the portfolio target is 50% stocks and 50% bonds. And that means that if there is a down market for stocks while you are taking stocks out of your taxable account, you are buying back those stocks and then some by selling bonds from your IRA. If you are doing that, you are not at undue risk in retirement of a short term bear market.

This video misses something major. All you need to do is sell the required amount of bonds in your tax deferred account and BUY the equivalent value in stocks in the same tax deferred account. Then when you sell the equivalent value of stocks in the taxable account, the net result is you sold bonds instead of stocks. I learned this from my Vanguard advisor, so I think the blog post you're referring to is assuming you are also doing this.

My brokerage is all stocks and my IRA is all bonds. My thinking is, when stock have a huge drop and I'm forced to sell, I will just turn around and sell bonds and buy the equivalent stocks back inside the IRA. Whatever is needed to keep my asset allocation the same. If both stock and bonds go down I'll tighten my belt and likely use my cash and/or dividends to get by.

Good advice to always think critically about “good advice!”

James, if I have 100% stocks in my taxable brokerage, and then need to withdraw when the market is down 20%, I'd just sell the stocks in taxable, then on the same day would sell bonds and buy stocks in my IRA. Example: I'd sell $40K of stocks in taxable (even if the market's down), then on the same day I'd sell $40K of bonds in my IRA and buy $40K of stocks in same. Money is fungible. Please explain why that wouldn't work. I've never ever known you to give bad advice, and I recommend your podcast and YouTube to everyone I lecture to ( as recently as this week), yet the advice you mention here seems wrong. Please explain!

In the scenario where you say a market drop occurs, even if you have all of your bonds in tax deferred acct, you simply sell the stock in your taxable account while simultaneously buying them in your tax deferred account from bond proceeds. Therefore you create cash for withdrawals regardless of the location of your bonds and without taking a loss on your stocks. Right?

Thanks James for another very informative video!

Thanks James - interesting analysis. One thing that I don't see much discussion on is using bonds specifically for liability matching. Bond funds still have sequence of return risk (personal experience with recent rate increases causing capital loss in bond fund). Why wouldn't we look more at building a bond ladder that matures monthly in retirement to replace income and only extend ladder when equities are up (just live on maturing bonds in down market)? Example $2M Investments, $5k per month required, 5 year monthly bond ladder = $300k - 15% of portfolio, 7 year = $420k - 21% of portfolio. Covers sequence of return risk. Allows selling equities only when they are up. Maximizes returns from equities. Eliminates sequence of returns from bond funds. Bonds are only for guaranteed income, not for arbitrage from down marked (eg 60/40 pain from selling when both are down).

Another great video James

Excellent points!! Really good depth of information. Great video. Makes you really think.

Thanks for another clear video. An additional complexity in the tax analysis is the impact of the stepped up basis at death in the brokerage account.

Totally agree James that was a good presentation.

If stock market goes down 25% and you need to withdraw $50k, why can’t you also sell $50k of bonds in your IRA portfolio and purchase equivalent stocks to make up those sold? You benefit with stock tax loss harvesting while also maintaining stock growth potential.

Great insights as usual. Appreciate your willingness to share your expertise with the "great unwashed."

Thank you James, you have helped my husband and I get a better handle on what to expect for retirement. A great podcast to listen to in the car commuting to/from work.

Another great tip and analysis. If one is willing to put more effort into asset management (and I don't mean derivatives or currency futures), there are ways to mitigate timing risk. A quibble: just because Year Now is a bear market and values are down, does not imply that you are losing money on are investments. As determined by when you purchased your assets, you could still be making a boat load of money. You are only suffering an emotional/theoretical loss compared to what you could have sold the assets for Last Year. Anyway my strategy: (1) I try to keep enough fully liquid nominal face value assets (checking, savings, CDs, fixed-value MM) to carry me for 2 to 5 years—usually enough to ride out any bear market. (2) I hold my investments in US Index Funds, Euro Index Funds, Latin America Index Funds, Asian Index Funds. This gives me flexibility in optimizing sales. (3) I used the specific share method of sale, so I can tailor the gains or loses to my tax situation. Granted this takes work.

Good breakdown of how to take a holistic view of your entire asset strategy (the forest) instead of focusing so intently on one tactic (the trees). Takeaway: don’t miss the forest for the trees.

Can you do a video on how bonds can/should be used to reduce risk in a retirement portfolio? I've had a pretty aggressive growth allocation that has served me well, but about 5 years from retirement I understand that I should rebalance it to be about 35% in bonds? But searching for bonds and bond funds is just confusing, especially since most of the short and longer returns all seem so low I'm not sure they'd outpace inflation. It certainly doesn't seem "low risk" to put investments in something I don't fully understand. Would something like a CD ladder be a good substitute for bonds in the "safe" (but higher yield than cash) part of my portfolio?